9. MAD – ECONOMY – WEEK 2

Q. While infrastructure sector in India faces the problem of investment deficit, it still is the lowest hanging fruit that can catapult India into the high growth trajectory. Elaborate.

A. I am using an article from the above-mentioned book to give some content (rather a lot of it) and also to help you guys frame structures.

The structure to the answer can be as follows:
1. Introduce with the problems that infrastructure sector is facing.
2. Highlight a few things that can be done to resolve this.
3. Don’t forget to highlight, how it will help India achieve a high growth trajectory.
Infrastructure facing the Problem of:
1. Growing Economy, requires more and better infrastructure.
2. Problem of Finance
3. Private partners seeking better terms
4. Slow Government approvals
5. Stalled Projects
6. Slow global growth
7. Twin balance sheet problem

Investment Deficit –

– Gap between Current and needed infrastructure
– Getting bigger
– ADB says, it is now 4% of GDP
– Banks are unwilling to lend
– Private Lending Institutions are defaulting (IL&FS crisis)

– Violation of FRBM
– Inflation
– Crowding out effect, leading to a lot of financial institutions willing to lend to government instead of private players because of inherent risks of the sector as well as ongoing slowdown in the sector

How will Macro Economic Stability help?
– Fiscal Consolidation will
o Enhance government’s credibility and lenders confidence
o It will help keep the interest rates low
– Low Inflation will
o Ensure stable returns to investors
– Policy Certainty will
o Help long term planning of Corporates

It will help bring in greater amounts of much needed foreign capital into infrastructure sector.

Reforming Public Finance –

– Transitioning from Current expenditure driven policy to Capital expenditure driven policy.
o Enhanced use of well-planned DBT can help in curtailing misuse of subsidies.
– Raising revenue by further incentivising registering under GST regime
– Expediting spectrum sales, disinvestment, monetizing govt. land holdings
– Transferring finished assets to private players for maintenance and the revenue raised be used to build new infrastructure
– Focusing on Toll and other User charges for enhancing sustainability of assets
It can help mobilise government’s finance to inclusive development oriented programs without compromising on government’s political realities, which might at time seem populist.

Untangling Stalled Projects –
– Land Pooling model of Andhra to build Amravati as capital can be replicated to explore innovative models of procuring land under LARR Act
– Strengthening of institutional architecture to give clearances, especially environmental
– Enhancing certainty of access to coal and other fuels can expedite the creation of a lot of infrastructure
It will help unlock the stagnant real-estate sector, a major contributor to GDP growth, which is stagnant from past few years.

Re-energise PPP –
– Operationalising 3PI (as suggested by Kelkar committee)
– Enhancing institutional capacity of research and development in matters relating to PPP
– Establishing sector regulators and ‘best-practice’ design
– Outlining key-principles of Risk Allocation
– Establishing clear norms of Financial Oversight of various SPVs
– Clear norms for Re-negotiation
It can present a greater thrust to private players to participate along with the government, to create infrastructure at a fast pace.
Sector-Specific Recommendations
Railways
– Independent Regulator
o With power to fix fares
o Fair access regulation
o Licencing and Technical Standards
Roads
– Various models need to be used as per the requirements
o Toll based
o HAM
o Optimal mix of these, as decided by regulators
Power
– Reform State Electricity Boards (SEBs)
– Grid enhancement to accomdate rising Renewable Energy generation
Urban Infrastructure
– Municipal bodies to be given more power
– Greater funds to ULBs (14th FC)
– NITI Aayog’s mandate can include this